Neil Unmack

Neil Unmack’s Profile

UK mortgage debt: remain Calm! All is Well!

August 6, 2009

That’s the message given by Moody’s today on the resilience of UK mortgage-backed securities to the current downturn. The survey is based on so-called master trusts, a kind of securitization vehicle first applied to U.K. mortgages about a decade ago which quickly became the most efficient way for a large bank to securitize home loans. The master trusts grew so big that they now finance about a fifth of all UK home loans (although a large chunk of this must have been from deals issued by banks after the credit crisis to use as collateral for borrowing with the central banks).

Master trust bonds haven’t been immune to the credit crisis. Forced selling by SIVs and funds caused yields on AAA master trust securities to gap out sharply from their low of around a tenth of a percentage point over Libor. Spreads have rallied in recent months, but they are still around 2 percentage points over Libor, largely because many asset managers simply won’t touch illiquid asset-backed debt, even if the returns are much higher than equivalent corporate bonds. 

Anyway, Moody’s latest report on the sector may give some grounds for cheer. The firm conducted a stress test of the master trusts to see how the deals would perform in a 1990s-style housing downturn. The result; no bonds, not even the sub-investment grade securities, would suffer a loss, Moody’s says. Moreover, no bonds would even be downgraded under the stress, which applied the same level of reposessions as seen in the last downturn.

There is one caveat here. Moody’s analysis assumes that loss severities — losses after repossessing and selling a house and taking into account accrued interest — will remain at similar levels to those seen so far this year. That may yet prove optimistic if prices start to fall again.